HC Deb 25 March 1969 vol 780 cc1510-22

3.21 a.m.

Sir Brandon Rhys Williams (Kensington, South)

I much regret that in spite of the very great deal which has been said in recent years on the subject of the protection of beneficiaries' rights in occupational pension schemes it is still necessary to refer to the matter. There seems to be very little in the Government's mind about it at the present time. I looked forward with the greatest interest, and in no partisan spirit, to the publication of the White Paper on national superannuation because I felt that, after all that had been said, we should find some recommendations on the subject of transferability of pension rights; but I looked for them in vain. In paragraph 158 one finds a virtual retreat from everything that had been promised. That paragraph is a winding down of commitments, it seems to me, on the whole subject.

At this hour of the morning one is torn between reading into the record an entire pamphlet on the subject—which I have no intention of doing—or offering a mere outline. I do not wish to go to either extreme, but I should like to use the time available to me to make a series of specific recommendations on the subject.

Mr. Speaker

Order. The hon. Member knows that the recommendations he makes must not involve legislation? We are debating the Second Reading of the Consolidated Fund (No. 2) Bill. It is in order to criticise administration, but not to suggest new legislation.

Sir B. Rhys Williams

I will endeavour to adhere strictly to that Ruling.

To a very great extent this matter lies in the hands of the Inland Revenue. Possibly the hon. Gentleman who has come here, I fancy, to reply to this debate is not the man who will be able to take up some of the points which I wish to make. Nevertheless, I hope I shall not be out of order.

In the first place one ought to consider the protection of the rights of people in existing schemes. I should like to come back in a moment to the question of the transferability of pension rights. There are some 60,000 or more of these schemes, and I think that there is the serious possibility of some laxity in the control of these funds by the trustees. Trustees are enabled to take advantage of taxation concessions, but whether in all cases they follow the standards one might expect is somewhat open to doubt in view of the very large number of these schemes and their rapid growth in recent years. It would be disastrous for this important branch of savings if there were a failure by a big scheme or a well-known scheme through lack of sufficient foresight or lack of sufficient clarity by the trustees in estimations of their future requirements. The tragedy would be all the greater if the firm in question were under the impression that it was fully funded at a stage of staff rundown and the gradual dispersal of its work force and if it were to pay out pension rights initially in full so that in the end the money available were to be used up while there were a large number of outstanding claims.

There is some conflict, which I have pointed to before, in the way in which administrative control is maintained over these schemes. There is a Registrar of Non-Participating Employments; some of the schemes come under the jurisdiction of the Registrar of Friendly Societies; and the bulk, I suppose, are under the tutelage of the Inland Revenue.

The Inland Revenue seems to be somewhat out of place in this, because if our policy is to increase savings through these schemes, the Inland Revenue's interest is, on the other hand, rather to protect the Revenue; it is not as enthusiastic to see the growth of these schemes as it no doubt is in preventing the schemes from running away and offering opportunities for tax evasion. In my opinion, that interest ought to be a secondary one. I would like to see the duties and status of trustees much more clearly defined, so that schemes which are going to claim the benefit of tax concessions should be under much greater compulsion as to the precise formula that they adopt and the methods by which they proceed.

I should like the degree of funding to be laid down much more precisely; that is to say, the calculations which establish the degree of funding to be established much more precisely than they are now. Beneficiaries should have much better information than they have now as to where they stand. It is quite wrong that the beneficiary of a pension fund should be obliged to ask where he stands or the extent to which the fund is fully paid up at any time, because in practice the management is very soon going to become aware of the people who are thinking of leaving by reason of the fact that some people inquire as to their pension rights and others do not.

Rather considerable pressure is, unfortunately, brought to bear on employees, in that they dare not inquire where they stand in regard to pensions because they are afraid of attracting adverse criticism. This is something which I feel is within the scope of the authorities at this time but is being neglected.

In speaking of the question of the value of the asset which the individual employee has in his firm's scheme, I am coming to my most specific recommendation, because whether we are talking about the protection of a man's asset in an existing scheme or ascertaining the conditions under which he might transfer from one scheme to another, what we come back to again and again is the problem of the valuation of the individual man's rights.

It is because people have shirked this particular problem that the difficulties of transferability have seemed so great. If, however, we were once to come to grips with the problem of the valuation of the individual brick in the total fund so that each man might learn to identify the asset which the trustees are holding on his behalf, it would become very much easier for him to judge the extent to which his employer is fulfilling the conditions of his employment by actually meeting his promises in regard to superannuation. He could also calculate what he could take with him if he changed his employment.

I recognise that when we discuss problems as abstruse as this we are bound to accept some compromises, and there may always be some degree of unfairness. But rough justice is a great deal better than no justice. I also acknowledge that there is bound to be a degree of intrusion by the authorities into personnel policy. But if the outcome of the tightening up of the regulations affecting private occupational schemes is an improvement of personnel policy in the sense that there is an improvement in communications between the management and the employee and in the imparting of knowledge, that would be a secondary benefit and one which we might do well to take into account.

My special interest is in the circum stances which arise on a change of jobs. I believe that the Government should seek at every stage to apply the principle that a pension is a form of deferred pay. I have attempted to make this point be fore. If a pension is recognised as a form of deferred pay, the funds in the hands of the trustees are seen as inalienably the property of the beneficiary—

Mr. Speaker

Order. I know of the hon. Gentleman's keen interest in and knowledge of this whole subject, but I think that what he is suggesting now could not be obtained except by legislation, and he cannot ask for legislation in this debate.

Sir B. Rhys Williams

I accept your Ruling at once, Mr. Speaker.

The Inland Revenue exercises extremely close tutelage over occupational pension funds, and the most abstruse and recondite points are brought up in the course of a year as a result of the strange and peculiar cases which have to be put up to the Inland Revenue for solution. I have studied a number of these cases, and I feel that administrative policy is coloured sometimes by considerations which are rather different from the principles which I am outlining and which, I think, should be the fundamental ones running through the Government's attitude to this problem.

First, I think that we must always identify the pension rights as a form of deferred pay. Second, we should colour everything that we do on the understanding that the trustees hold this money in trust for a specific purpose. Therefore, it is quite wrong that in any circumstances they should refund that money to the employer. But this is frequently permitted. In fact, it is insisted upon by the Inland Revenue in the event of the beneficiary electing to take back his own contributions. If he should be so minded, on leaving his firm, to take out his own contributions, the Inland Revenue insists, in effect, upon the trustees confiscating anything which might be deemed to have been put into the fund on that man's behalf by his employer. This contravenes the basic principle which I suggest should rule all these administrative matters.

As to the question of preservation or transferability, which is the principal problem which troubled the authors of the Morgan Report and which is probably the locus classicus in this whole business, it seems obvious that transferability is the right target. We must struggle until we find our way to that. We must not allow ourselves to be waylaid into thinking that preservation is the only satisfactory alternative.

I will give a simple example. In a scheme which aims to give the beneficiary on completion of his service two-thirds of his retirement salary, a man who changes his job halfway through his career at a salary of, say, £1,200 receives, in respect of that part of his service, a pension of £400. If he goes on to retire at £1,500, on the other half of his service he receives a pension of £500. So the two preserved pensions would amount to £900 a year. If, however, he stayed with the original scheme or had the benefit of transferability and retired at £1,500 he would receive £1,000. In that simple and very common case we find that transferability would have given £1,000 a year and preservation only £900. Preservation is, therefore, an option which is 10 per cent. less attractive to the beneficiary.

There is, of course, also erosion by inflation, as well as by the sheer mathematics of the operation. It seems wrong that the trustees should be permitted to pocket the capital gains which naturally accrue with the passage of time in inflationary conditions, because they are allowed to maintain the assets in then-own hands while leaving their commitment in terms of out-of-date values. The beneficiary pays in good money and draws out bad.

The Minister gave us an estimate not many weeks ago that preservation of pension rights, if employers granted that in full, might cost £20 million to £25 million in a year, but transferability would cost £100 million more. This seems to give 100 million reasons why we should fight our way through to transferability and not come to rest simply on preservation.

About twelve months ago I raised this subject when I had the good fortune to win the Ballot for Private Members' Motions. I said then that this was a veritable minefield of technicalities. So it is, but I have had the good fortune to be guided safely through this minefield by extremely expert people who have been taking an interest in what I am trying to do in this sphere. I am delighted to give the benefit of this advice to the Minister for what it is worth.

I suggest that the Minister should regard the problem as purely one of valuation. He should not allow himself to be bemused by the multiplicity of schemes with all the different benefits which are permitted by the Inland Revenue for tax concession purposes. Once the basis of valuation has been established, all that is necessary is to ensure that it is enforced.

The problem is aggravated because final salary schemes are becoming increasingly popular. In simple money purchase schemes, the difference between preservation and transferability was not nearly so significant, but, because of the general acceptance of inflation as an inevitable condition of our life, final salary schemes are becoming more and more popular, since they give the beneficiary protection at any rate up to the point of retirement.

To define the individual beneficiary's rights in occupational pension funds based on final salary, I do not think it is necessary to go into the hypothetical flights of fancy indulged in by some people when dealing with the question of job trajectories. Obviously it is right that the final salary should be the salary at the completion of the man's career and not the salary on the completion of his work for a particular employer. When trustees are dealing with a man who has left in mid-career they are introducing a new and artificial element if they take the salary which the man happened to have reached at the time when he left the firm. It is a purely arbitrary figure, and an entirely wrong basis of valuation.

The necessary basis of valuation is the salary that the man would reasonably have expected to reach had he stayed in the original firm until the time of his retirement. This is where there is a danger of being taken into hypothetical flights, into the estimation of salary trajectories, which lead one into a mass of doubt and dispute. I suggest that one should ascertain quite clearly what the employer has, in fact, paid over to the trustees in respect of each individual; that is, what the employer's own calculation was in topping up the fund, as he will have had to do annually—or more often—to ensure that the trustees are in a position to meet their eventual commitments.

I think, too, that it is necessary that we should establish very clearly the percentage to which at any time the trustees are in a position to meet the total commitments on the fund; that is to say, the percentage to which the scheme is funded. Many people think that their schemes are fully funded, but if they were to estimate the value of each employee's rights instead of using aggregations they might find that they had not fully covered the eventual obligations of the trustees.

If, however, we use the simple rule of thumb that we need to ascertain only what the employer himself has calculated in making payments into the hands of the trustees we arrive at a figure which the trustees can write on a chequer to the trustees of the new fund. This is the most important thing, because the same formula can be used for buying rights in a new scheme as are used in taking rights out of an old scheme, even though those schemes are completely different in the sort of benefits that they are allowed to give.

Private occupational schemes are approved sometimes on the basis of 60ths, or sometimes 80ths, some with retirement age of 60, or 62, or 65. Some give protection to widows and others do not. Some include life insurance provisions and others do not. This is the multiplicity of schemes, all of which come within the general approval of the Inland Revenue. If we are to fight our way through to transferability between schemes which are incompatible—

Mr. Speaker

Order. I must ask the hon. Member to take note of what I have now said several times. I imagine that the transferability of pensions cannot be achieved except by legislation. The hon. Member can ask for all the inquiry that he wants into the administrative valuation of pensions. The hon. Member is debating, not a Motion, but the Second Reading of the Consolidated Fund (No. 2) Bill, on which to suggest new legislation is out of order.

Sir B. Rhys Williams

Mr. Speaker, I fully appreciate that, and I am sorry if I have given the impression that I am disregarding your Ruling because I am doing my utmost not to do so.

It is clear from the survey by the Government Actuary that a certain number—all too few, but a certain percentage—of existing schemes endeavour to give transferability, but for various reasons employees opt not to take the benefit of transferability. I think that this is because of the way in which the matters with which I am dealing are handled by the Inland Revenue. Many people—indeed I myself—decided that the transferability of pension rights in the circumstances in which such a thing was obtainable was not an attractive option. It is to a certain extent an administrative change which is required. It would be obtained more radically by a statutory change, but if that is out of the question, administrative changes could take us a good way down that road. The fixed points in determining a man's rights for leaving the fund are his age, salary and length of service, and the problem is to reckon the value of his asset at that time. In the new scheme there would be the same fixed points; that is, his age, his new salary and the value which he can bring with him in the form of a cheque from one set of trustees to another. The problem then is to reckon length of service—

The Under-Secretary of State for Employment and Productivity (Mr. Roy Hattersley)

I do not want to urge the hon. Gentleman to transgress the rules of order or to curtail his speech, but, so that I can reply, would he say specifically in what way the Government can influence these matters without legislation? I am genuinely anxious to meet his points, but my advice is that there is virtually no way in which his points can be met without legislation.

Sir B. Rhys Williams

The hon. Gentleman has studied the subject, and if that is his conclusion, I hope that he will act upon it. There are certain points which are entirely within administrative discretion. When a man contributes to a new pension scheme, some topping up backwards should be permitted. If he is offered perhaps eight years back service on the strength of his cheque from his previous employers, the Inland Revenue should not prevent him from adding to that from his own resources to lengthen the period of service that he can purchase in the new scheme. It may seem like tax evasion, and any fairminded person must recognise that the employee should not be allowed to go back to before Methuselah and get totally unreasonable tax concessions; but within reasonable limits, some topping up should be permitted.

I am concerned about the problem of lump sums, a system entrenched in the public sector, which is not permitted except in certain types of schemes in the private sector, which are known as the 388 schemes, which do permit some capital payment—

Mr. Speaker

Order. Again, I hope that the hon. Member will take some note of the Chair. The absence of lump sums in private schemes cannot be changed by the Government except by legislation. The lump sums in Government pension schemes cannot be changed except by legislation.

Sir B. Rhys Williams

I have, finally, three specific recommendations to make which arise if the Inland Revenue is bent upon helping the growth of savings through occupational schemes and we are willing to shut our eyes to some extent to any possibilities for tax evasion. The Inland Revenue should ease the restriction on the two-thirds maximum, particularly when taking account of previous preserved pensions which are small. The Inland Revenue has devised a system of what it calls "uplifted sixtieths" which is purely an administrative invention and which represents a nonsensical formula since it has no foundation based on a concrete principle. Concessions could be made in the value of the pension which the final employer might be permitted to give but which at present is restricted by the Inland Revenue.

The Inland Revenue could also ease the restrictions on post-retirement pension increases so as to take into account the real changes which take place in capital values. This would be much preferable to an arbitrary formula. Equally, the rules applying to the administration of double schemes, in which trustees run 379 and 388 schemes simultaneously, could be more generously applied.

There are many other points of detail with which I could deal, but I will not delay the House at this hour. I urge the Minister to abandon the spirit of the Morgan Report, which was a defeatist document, and recognise the need to protect pension rights by full transferability. He would make millions of people grateful if he would act on this matter at once.

3.52 a.m.

The Under-Secretary of State for Employment and Productivity (Mr. Roy Hattersley)

You will appreciate the difficulty in which I find myself, Mr. Speaker, in what must, by the nature of things, be a short reply to the points raised by the hon. Member for Kensington, South (Sir B. Rhys Williams). The hon. Gentleman not only drew attention to a matter which might hypothetically concern legislation, but also referred to a matter on which the Government have already expressed their intention to introduce legislation. I am, therefore—because of the rules of order—precluded from answering most of the points he covered.

Two main themes ran through the hon. Gentleman's remarks; first, what should be done by the Government by way of legislation—I am precluded from commenting on that—and, second, what might be done by private schemes, a matter which is virtually, in every respect, out of the Government's control, unless legislation were introduced—and I am, therefore, precluded from commenting on that, too.

Out of courtesy to the hon. Gentleman and the House I will reply on the basis that his speech was a criticism of the general judgments that the Government have made in, for example, the White Paper "National Superannuation and Social Insurance." The hon. Gentleman described that White Paper in general, and Chapter VI of it in particular, as a retreat. He also said that it was difficult to understand what was in the mind of the Government.

The White Paper could not have set out more clearly what the Government have in mind on this issue. It stipulates clearly—and Chapter VI explains the reasons why—that it is not the intention of the Government in a political sense, but more because of the inherent difficulties involved, to adopt some of the courses urged on us by the hon. Gentleman. Chapter VI makes it clear that, for reasons of administration and calculation of benefit, transferability is not possible. It also points out that, in our judgment, the preservation of deferred pension rights is possible. Nothing could be more specific in arguing that, while both schemes are fraught with difficulties, the difficulties of transferability are insuperable while the difficulties of the preservation of deferred rights can be overcome by certain means.

Mr. Speaker

Order. The second of those could be carried out only by legislation.

Mr. Hattersley

Yes, Mr. Speaker. I was merely hoping to show that the Government had made a judgment about the different difficulties, but I pass on immediately to the second point raised by the hon. Member. He asked the Government to consider safeguards for any scheme of transferability, or preservation which might exist, and suggested that the safeguards already operated by the Government were inadequate. I would remind him of those safeguards, which are three in number.

First, the general laws applying to trusts and trustees apply to the trustees of pension funds in the way that they apply to the trustees of other trusts. Those are considerable.

Secondly, any scheme approved by the Inland Revenue as appropriate for tax relief must submit its rules to the Inland Revenue. That is the second important check.

The third safeguard, as the hon. Member pointed out, is that schemes contracting out, or applying to be contracted out, for graduated pensions must be referred to the Registrar of Non-Participating Employees, and he, as well as carrying out his other examinations, makes a judgment about the schemes' viability.

Those are three safeguards which, in the Government's view, must apply to all schemes, irrespective of whether they offer their participants, privately or unilaterally, the prospect of preservation or transferability, and they are safeguards which remain appropriate whether that prospect of preservation and transferability is offered or not. We would not consider it appropriate to insist on wider and more positive safeguards for schemes offering transferability or preservation than for schemes in general. I believe that this is appropriate for a scheme which offers transferability for its members even in the absence of legislation—a scheme which is voluntarily seeking to make itself transferable, assuming that there are other schemes into which it can be transferred.

The hon. Member went on to say that the basic problem was the problem of the transfer of values and rights into the new schemes. He urged the Government not to shirk the problem of analysing the transfer value. It will not do for him simply to say that the only difficulty is the calculation of the value which might have accrued in the old scheme and be transferred into the new. This is the nub and centre of the difficulty. The Government's advice on transferability and preservation in relation to private schemes, and their views on the desirability of transferability and preservation, are based on the knowledge that calculating the value in the old scheme and its transfer value into the new is a problem of almost insuperable difficulty, not only because of the variety of schemes which exist at the moment, and not only because hardly any two schemes outside the public sector have the same rules, offer the same benefits and require the same contributions. Even when one has two virtually identical schemes the calculation of rights in the old scheme and their transfer to the new, in any meaningful sense, can be done only after detailed and specific negotiation between scheme and scheme. Even then the recipient may not receive anything of greater value than his accrued rights in the original scheme which could have been obtained by way of a deferred pension.

The hon. Member went on to urge the Government not to regard transferability as a goal which they could not reach ultimately. Again, the rules of order prevent my making any comment on that attitude. All I can say to the hon. Member is that we are acutely aware of the actuarial difficulties in respect of the transfer of pensions. We are acutely aware of the need to encourage private schemes so to calculate their arrangements that voluntary transferability is occasionally possible and voluntary preservation is certainly possible. As to our general intentions outside that voluntary area, I can only remind the hon. Gentleman that the Government's attitude has been made clear on many other occasions. Whilst the rules of order prevent me from explaining it in any detail this morning, the hon. Gentleman will know, both from the White Paper and from the debate on 29th April last, what our general proposals are.

Mr. Speaker

Order. I remind the House that some hon. Members have been waiting now over 12 hours to take part in this debate. Reasonably brief speeches help.

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